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Vertical Integration and Optimal Reimbursement Policy

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  • Christopher Afendulis
  • Daniel Kessler
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    Abstract

    Health care providers may vertically integrate not only to facilitate coordination of care, but also for strategic reasons that may not be in patients' best interests. Optimal Medicare reimbursement policy depends upon the extent to which each of these explanations is correct. To investigate, we compare the consequences of the 1997 adoption of prospective payment for skilled nursing facilities (SNF PPS) in geographic areas with high versus low levels of hospital/SNF integration. We find that SNF PPS decreased spending more in high integration areas, with no measurable consequences for patient health outcomes. Our findings suggest that subjecting integrated providers to higher-powered reimbursement incentives, i.e., less cost-sharing, may enhance medical productivity. More generally, we conclude that it may be efficient for purchasers of health services (and other services subject to agency problems) to consider the organizational form of their suppliers when choosing a reimbursement mechanism.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17316.

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    Date of creation: Aug 2011
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    Publication status: published as Afendulis, Christopher C., and Daniel P. Kessler. “Vertical Integration and Optimal Reimibursement Policy,” International Journal of Health Care Finance and Economics 11:3 (September 2011) 165-179.
    Handle: RePEc:nbr:nberwo:17316

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    1. Ellis, Randall P. & McGuire, Thomas G., 1990. "Optimal payment systems for health services," Journal of Health Economics, Elsevier, Elsevier, vol. 9(4), pages 375-396, December.
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    3. Ellis, Randall P., 1998. "Creaming, skimping and dumping: provider competition on the intensive and extensive margins1," Journal of Health Economics, Elsevier, Elsevier, vol. 17(5), pages 537-555, October.
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    10. Cutler, D.M., 1992. "The Incidence of Adverse Medical Outcome Under Prospective Payment," Harvard Institute of Economic Research Working Papers 1603, Harvard - Institute of Economic Research.
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    13. Robinson, James C, 1996. "Administered Pricing and Vertical Integration in the Hospital Industry," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 39(1), pages 357-78, April.
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    Cited by:
    1. Timothy Bresnahan & Jonathan Levin, 2012. "Vertical Integration and Market Structure
      [The Handbook of Organizational Economics]
      ," Introductory Chapters, Princeton University Press.

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